14 BARRON’S July22,
The retailer has spent
wisely and stands to
benefit from the closings
of rivals’ stores. Yet its
stock is undervalued.
ByAviSalzman
Time
ToAim
Higher
On
Target’s
Stock
Thesharestradeatlessthan15timesexpected
earnings, compared with 23 times for Walmart
(WMT)and33for CostcoWholesale (COST).And
evenagainstthosestandouts,Targetisholdingits
own, posting a 5.4% average same-store sales in-
creaseoverthepastfourquarters,versus3.9%for
Walmart and 9% for Costco.
Target’s efforts to emphasize digital sales,
pickup in stores, and faster delivery have helped
ittostealmarketsharefromstodgierdepartment
stores.Itsoldmorethan$5billiononlinelastyear,
upfromjustover$1billionin2012.Thedisappear-
ance of American malls shouldn’t hurt Target.
“Look at all the retailers theyusedtocompete
against that are being knocked out of business,”
Bill Smead of Smead Capital Management tells
Barron’s .“They’renotinthemallsthatarebeing
damaged.”
Smead bought into Target in 2017, when it
traded at $52 and investors worried about Ama-
zon’spushintogroceries.Henowthinksthestock
isworth$124,basedonhisexpectationthatTarget
cansteadilygrowearningsat10%ayear.Itisal-
ready on track to do that this year, posting 16%
earnings per share growth in the first quarter.
Targethasbenefitedfromtheclosureofstores
likeToys“R”UsandBabies“R”Us,postingdou-
ble-digitgrowthinsame-storetoysalesinthefirst
quarter.“Wefinished2018withhugemarketshare
gainsineach,”ChiefExecutiveBrianCornell,said
onTarget’sfourth-quarterearningscallinMarch.
(Target declined to comment for this article.)
Goldman’sMcShaneexpectsotherplannedclo-
sures to result in similar share gains for Target,
pointingtotheannouncedshutteringsof800Gym-
boreeGroupstores,650Dressbarns,and300Chil-
dren’s Place shops, among others.
Shoppers from those stores willfindatrans-
formedTarget.Thecompanyhasbeenremodeling
its stores at a brisk pace to make them brighter
and more modern and speed pickups of items or-
dered online.
Theretailerplanstocompleteabout300remod-
els in each of the next two years, after doing 400
in 2017-18. In some stores, shoppers can choose
from two entrances—one for fast pickups, grab-
and-go groceries, and other quick trips, and the
other for longer shopping excursions. A drive-up
lane makes pickups almost instantaneous. When
peoplepickupitemsorderedonlineatstores,ful-
fillment is 90% cheaper for Target.
Ofthe$13billionincashTargetmadefromop-
erationsin2017and2018,$6billionwenttocapital
expenditures,includingremodelings,$2.7billionto
dividends(thestockyields3%),$3.2billiontobuy-
backs, and $1 billion to paying off debt.
ItisamuchsmarteruseofcashthanTarget’s
last experiment—an aborted adventure into Can-
adathathurtreturnsanddistractedthecompany
from challenges in the U.S.
TargetboughtleasesfromtheparentofCana-
diandiscountchainZeller’sin2011andannounced
ambitions to open more than 100 stores north of
the border. But the store rollout was sloppy, and
Targethadtroublemanaginginventory,leadingto
empty shelves at many locations. It was “losing
moneyeveryday,”Cornellacknowledged.Target
pulled the plug on the investment in 2015.
“That was a total disaster for them,” Smead
says.“Theygothandedahugeamountofhumility,
butnowtheyarerepositioningtheirstorestore-
ally meet what the customers want.”
ExpectMore,PayLess
Company / Ticker Recent
Price
Market
Value (bil)
Expected 2019
EPS Growth
Est.
Forward P/E
Costco / COST $281.51 $124 19% 33.
Walmart / WMT 113.90 328 0 23
Target / TGT 88.01 45 10 14.
Macy's / M 22.10 7 -26 7.
Kohl's /KSS 49.33 8 -6 9.
Source: FactSet
RETAILERS HAVE ANNOUNCED PLANS TO SHUT OVER